Federal, state govts urged to cut spending

Treasurer Wayne Swan has revealed a $7.5 billion hit to the national budget. Source: AAP

FEDERAL and state governments are being urged to live within their means and make more aggressive cuts in public spending.

In a report released on Sunday, the Grattan Institute warned Australia must prepare for more difficult economic times ahead by reducing its overall budget deficit.

The think tank says Australia faces a "significant risk" of posting deficits of around four per cent of gross domestic product (GDP) over the next 10 years.

Averting them would require governments to find savings and tax increases worth $60 billion a year.

"This alarming task is not impossible, but it will require tougher choices than those made over the last decade," the report said.

"To be sustainable, current budgets need to be in surplus."

The institute acknowledged that clawing back a deficit of four per cent of GDP required that everyone experienced some "budget pain".

But it was vital to cut back on spending, with "far more negative than positive forces" on the economic horizon.

"This will be politically difficult, but the alternative is unsustainable budget deficits that will be even more painful to reverse in the future," the report said.

The institute warned company and carbon tax revenues were likely to be one per cent of GDP - or $15 billion a year - less than current forecasts.

"Current revenues are inflated by the mining boom and Australia's high terms of trade.

"If, as many predict, minerals prices fall, government revenues will fall by another one per cent of GDP."

In the federal government's financial statement for February 2013, released last week, there was an underlying cash deficit of $23.646 billion, higher than $17.993 billion forecast in the mid-year budget update released in October.

The difference of $5.713 billion was mainly due to lower tax revenue and higher welfare payments, the government says.

A spokesman for Treasurer Wayne Swan said the government was committed to making the budget sustainable over the long term.

He said it had "demonstrated this again recently with the announcement of responsible savings to help pay for better funding for schools".

He said without such measures, the budget position in 2020-21 would be $250 billion worse off.

"This includes tackling unsustainable spending on health - which this report identifies as a significant issue - through measures such as means testing the private health insurance rebate and cutting the millionaires' dental scheme," the spokesman said.

Mr Swan on Sunday revealed that the high dollar and lower terms of trade have resulted in a $7.5 billion hit to revenue in the federal budget.

He said the same factors would also impact forward estimates.

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